Journal of International Money and Finance xxx (xxxx) xxx

Contents lists available at ScienceDirect

Journal of International Money and Finance

journal homepage: www.elsevier.com/locate/jimf

Reprint: Monetary policy uncertainty and monetary policy

surprises q,qq
Michiel De Pooter a,⇑, Giovanni Favara a, Michele Modugno a, Jason Wu b
a
Board of Governors of the Federal Reserve System, United States
b
Hong Kong Monetary Authority, Hong Kong Special Administrative Region

a r t i c l e i n f o a b s t r a c t

Article history: Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-
Available online xxxx term nominal and real yields. For a given monetary policy shock, the reaction of yields is
more pronounced when the level of monetary policy uncertainty is low. Primary dealers
JEL Codes: and other investors adjust their interest rate positions more when monetary policy uncer-
E4 tainty is low than when uncertainty is high. These portfolio adjustments likely explain the
E5 larger pass-through of a monetary policy shock to bond yields when uncertainty is low.
G1
These findings shed new light on the role that monetary policy uncertainty plays in the
Keywords: transmission of monetary policy to financial markets.
Monetary policy surprises Published by Elsevier Ltd.
Monetary policy uncertainty
Interest rates
Primary dealers

1. Introduction

Federal Reserve communications have changed significantly over the past two decades and have become increasingly
transparent. In the early 1990s, monetary policy decisions by the Federal Open Market Committee (FOMC) were not
announced to the public and decisions had to be inferred from movements in interest rates. Today, the FOMC uses a range
of tools to communicate its economic and inflation outlook, policy decisions, and views about the future path of policy,

DOI of original article: https://doi.org/10.1016/j.jimonfin.2020.102323

q
The views expressed in this paper are those of the authors and do not reflect those of the Federal Reserve Board, the Federal Reserve System, or the Hong
Kong Monetary Authority. We thank Nicholas Bloom, Steven Davis, Domenico Giannone, Luca Guerrieri, Refet Gürkaynak, Beth Klee, Walker Ray, Barbara
Rossi, Eric Swanson, Min Wei, and Egon Zakrajšek, as well as seminar participants at the 2019 Advances in Applied Macro-Finance Conference at Monash
University, the 2019 Asia Economic Policy Conference at the Federal Reserve Bank of San Francisco, the 6th Asset Pricing Workshop at University of York, the
2019 Money, Macro & Finance Conference at London School of Economics, and at the Banco de la República and the Federal Reserve Board for helpful
comments and suggestions. All remaining errors are our own.
qq
A publisher’s error resulted in this article appearing in the wrong issue. The article is reprinted here for the reader’s convenience and for the continuity
of the special issue. For citation purposes, please use the original publication details; Journal of International Money and Finance 112 (2021) 102323. DOI of
original item: 10.1016/j.jimonfin.2020.102323.
⇑ Corresponding author.
E-mail address: michiel.d.depooter@frb.gov (M. De Pooter).

https://doi.org/10.1016/j.jimonfin.2021.102401
0261-5606/Published by Elsevier Ltd.

Please cite this article as: M. De Pooter, G. Favara, M. Modugno et al., Reprint: Monetary policy uncertainty and monetary policy surprises,
Journal of International Money and Finance, https://doi.org/10.1016/j.jimonfin.2021.102401
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

including FOMC statements and minutes, post-meeting press conferences, the Summary of Economic Projections, as well as
testimonies and speeches.1
In part reflecting these changes, the perceived uncertainty about the path of monetary policy in the U.S. has changed
noticeably over time. Fig. 1 shows one measure of this uncertainty based on Swanson (2006): the width of the probability
distribution of the federal funds rate one year ahead, as implied by market prices on interest rate derivatives. As is evident, U.
S. monetary policy uncertainty fluctuated pronouncedly in the early 1990s, declined in the 2000s, reached a trough during
the zero lower bound (ZLB) period, and moved up again in recent years after the FOMC began to lift interest rates away from
the ZLB.
Despite enhancements to FOMC communications, financial markets have at times been surprised by monetary policy
announcements. These surprises could reflect either macroeconomic surprises or, as evident during the ‘‘taper tantrum” epi-
sode in 2013, a combination of misinterpretation of policy intentions and excessive investor risk-taking predicated on over-
confidence about the future course of monetary policy. This paper shows that the pass-through of Fed policy surprises to
medium- and long-term U.S. interest rates depends on investors’ perceived level of uncertainty about the path of the federal
funds rate. A positive 10-basis point (i.e., tightening) monetary policy shock—measured by the reaction in the 2-year nominal
Treasury yield in a 60-minute window surrounding an FOMC announcement—is associated with a 20-basis point increase in
the 10-year real rate when monetary policy uncertainty is low, i.e., at the lower quartile of its historical distribution. In con-
trast, the same 10-basis point tightening shock raises the 10-year real rate by only 4 basis points when uncertainty is high,
i.e., in its upper quartile. Thus, the pass-through of monetary policy surprises to longer-term rates is larger when uncertainty
is low than when uncertainty is high.
To understand the mechanism behind these results, we decompose bond yields into two components—the expected rate
component, which is the market’s average expectation for the future path of short rates, and the term premium, the com-
pensation for bearing the risk of holding a long-term bond instead of a series of short-term bonds—to analyze whether
the strong policy surprise pass-through amid low uncertainty is due to a re-evaluation of the economic outlook, or due to
changes in risk premiums. While both components increase in response to a tightening monetary policy shock, our results
show that the term premium displays a larger reaction than the expected rate component, especially when uncertainty is
low. Specifically, when uncertainty is at the lower quartile, we find that a 10-basis point tightening shock leads to an 8-
basis point increase in the 10-year real term premium and only a 2.4-basis point increase in the expected real rate compo-
nent. In contrast, when uncertainty is at the upper quartile, both effects are only around 1.5 basis points.
One potential explanation behind these findings is that investors are more complacent when monetary policy uncertainty
is low. If so, they will be more willing to take larger and/or riskier (e.g., more duration risk) positions in interest rates. When
subsequently confronted with a monetary policy surprise, they may need to make large and abrupt adjustments to ‘‘cut
losses” or to scale down risk-taking, which moves risk premiums. Consistent with this explanation, we find evidence that
uncertainty affects how investor risk positions respond to surprises: in response to a tightening monetary policy shock, pri-
mary dealers—the most important financial intermediaries in U.S. fixed income markets—significantly reduce their net long
positions in Treasury securities when prevailing monetary policy uncertainty is low; in contrast, position adjustments to the
same shock are not statistically significant when uncertainty is high. Other market participants exhibit similar behavior: the
Commodity Futures Trading Commission’s (CFTC) measure of ‘‘speculative” positions in interest rate derivatives, a proxy of
the net interest rate position of investors such as hedge funds and asset managers, are also reduced much more in response
to a tightening shock when uncertainty is low than when uncertainty is high.
Our analysis is based on event study regressions. Following Hanson and Stein (2015) and Gilchrist et al. (2015), we use the
change in the 2-year nominal Treasury yield in a 60-minute window around FOMC announcements as our main proxy of
monetary policy surprises on FOMC days. We regress the two-day change in 5- and 10-year nominal and real Treasury yields
on monetary policy surprise, the Swanson (2006) measure of market-implied monetary policy uncertainty, and the interac-
tion between surprise and uncertainty. Our main interest is in this interaction term, which models the responses of yields to
monetary policy surprises conditional on the level of uncertainty.
Our exploration of the mechanism behind the empirical relationship between yields, surprise and uncertainty also uses
event study regressions. The analysis of term premiums uses two-day changes in the term premium and expected rate com-
ponent estimates of Kim and Wright (2005) and D’Amico et al. (2018) as dependent variables. As for the investigation into
investor position changes after FOMC announcements, the dependent variable is either the weekly change in duration-
weighted net primary dealer Treasury position, or the weekly change in duration-weighted net CFTC speculative position
in interest rate futures and options on interest rate futures. Both types of weekly change encompass an FOMC
announcement.
This paper is organized as follows: Section 2 provides a brief review of related literature; Section 3 describes the data;
Section 4 introduces our empirical framework; Section 5 presents the main result that monetary policy uncertainty affects
the transmission of monetary policy surprises to longer-term nominal and real Treasury yields, with Section 6 providing
robustness check results; Section 7 breaks down such effects into expected rates and term premium components of yields,

1
For an overview of how FOMC communications have evolved over the past three decades, see for example Table 3 in Cecchetti and Schoenholtz (2019), as
well as the event lines in Fig. 1.

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Fig. 1. Shown is the level of monetary policy uncertainty, measured as the 90% width of the market-implied distribution for the effective federal funds rate
at the one-year horizon, computed from at-the-money eurodollar futures options and adjusted for the level difference in volatility between the federal
funds rate and eurodollar rates. Shaded areas reflect NBER recessions. Source: CME Group; authors’ calculations.

and presents evidence that changes to investors’ interest rate positions could explain why the term premium-channel dom-
inates. Section 8 examines position adjustments by primary dealers and speculators. Section 9 concludes.

2. Literature

Our main finding that monetary policy surprises have a sizable impact on longer-term real yields are consistent with
recent papers by Hanson and Stein (2015) and Nakamura and Steinsson (2018). However, these two papers interpret the
result through very different lenses. Hanson and Stein (2015) find that monetary policy surprises affect longer-term real
rates mainly through changes in investors’ risk-taking behavior and their impact on term premiums. Our findings lend sup-
port to this type of channel, and further demonstrate that the magnitude of effects depends on the prevailing level of mon-
etary policy uncertainty. Our findings resonate less with the explanation of Nakamura and Steinsson (2018), which
emphasizes that monetary policy surprises lead to re-evaluations about the state of economy and therefore tend to move
the expected rates component of medium- and long-term yields.2
A paper related to ours is Tillmann (2019), which also demonstrates that uncertainty affects the pass-through of mone-
tary policy surprises to yields and term premiums. There are several important ways the two papers differ. First, Tillmann
(2019)’s analysis uses monthly data, whereas we use a high-frequency event study approach. An event study approach is
predicated on its strength on purging the effects of other factors—such as macroeconomic news—on yields (see, e.g.
Gu} rkaynak et al., 2005, for a discussion). Indeed, in a robustness check, we show that when the event window is further nar-
rowed to just 60 min (rather than two days), during which virtually no other factors are driving yields, our main results con-
tinue to hold. Second, Tillmann (2019) uses the news-based approach of Husted et al. (2019) to capture monetary policy
uncertainty, whereas we use a fed funds futures and eurodollar options-implied measure of uncertainty, which is more rel-
evant in a study of Treasury yields assuming that similar cohorts of investors trade futures, options and yields. Finally, in
contrast to Tillmann (2019), we conduct an explicit investigation into how investors’ interest rate positions react to mone-
tary policy surprises at varying levels of uncertainty, thus uncovering a potential mechanism behind our main results. Bauer
et al. (2019) also study the role of uncertainty in the transmission of monetary policy to financial markets using a high-

2
Bauer and Swanson (2020), however, do not find evidence consistent with the presence of a ‘‘Fed Information Effect” as argued by Nakamura and Steinsson
(2018).

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

frequency event study approach. As in Tillmann (2019), however, they do not offer a mechanism through which uncertainty
affects the transmission of monetary policy.
One important paper that studies the role of monetary policy uncertainty on yields is Swanson and Williams (2014), who
show that the response of bond yields to macroeconomic news is muted when monetary policy uncertainty is low. This find-
ing seemingly contrasts with our main result that the response of yields to monetary policy surprises is exacerbated when
monetary policy uncertainty is low. But both sets of results are not inconsistent with each other. Economic surprises may
only move yields in limited ways when investors hold firm beliefs about the central bank’s reaction function. The material-
ization of monetary policy surprises, on the other hand, could usurp investors’ beliefs altogether and, as we demonstrate in
this paper, force abrupt changes in investor positions based on that belief.
This paper may also shed some light on the debate about the issue of constructive ambiguity. Stein and Sunderam (2018)
pointed out that investors could be complacent and monetary policy may suffer from time inconsistency if policymakers
choose to reduce uncertainty about their reaction function. They could do so, for example, by adopting a policy rule (e.g.,
Taylor, 1993 or Taylor, 1999). According to our results, any deviations from such a rule prescription can cause large fluctu-
ations in investor positions and term premiums because of the low uncertainty environment created by the adoption of the
rule. That said, it should be acknowledged that in this paper we do not separately identify the part of monetary policy uncer-
tainty that is due to uncertainty about the monetary policy reaction function from the part that is due to uncertainty about
the macroeconomic outlook.

3. Data

Following Hanson and Stein (2015) and Gilchrist et al. (2015), we identify monetary policy surprises on FOMC days using
the change in the 2-year on-the-run nominal Treasury yield over a 60-minute window surrounding an FOMC announcement
(from 15 minutes prior to 45 minutes after the release).3 Since no other economic news is typically released during this time
window, changes in short-term interest rates can almost solely be attributed to news in policy decisions and other FOMC com-
munications that was not anticipated by market participants.4
Underlying our measure of monetary policy surprise is the assumption that changes in the 2-year yield capture both sur-
prise changes in the target rate of the federal funds rate and in its expected path, which allows us to identify monetary policy
surprises during both the conventional and the unconventional monetary policy regimes. Our choice for monetary policy
shock is important given the consensus in the literature (Gu } rkaynak et al. 2005, and Campbell et al., 2012) that communi-
cations about the future path of the federal funds rate are the primary form of monetary policy news on FOMC announce-
ment days. Indeed, Gu } rkaynak et al. (2005) argue for distinguishing between a target and a path factor. Swanson (2019) goes
one step further and advocates for distinguishing between surprise changes in the federal funds target rate, forward guid-
ance, and large-scale asset purchases, showing that each of these can have quite different effects on yields. Here we use a
single metric (changes in the 2-year yield) in part for ease of comparison with studies related to ours referenced earlier,
but mostly because our focus is on the role that uncertainty plays in the transmission of monetary policy shocks rather than
on the differential response of yields across monetary policy regimes.5
The daily data on 5- and 10-year zero-coupon nominal Treasury yields and instantaneous nominal forward rates at the 5-
and 10-year horizon are described in Gu } rkaynak et al. (2007). We also use 5- and 10-year real Treasury yields, derived from
prices on Treasury Inflation-Protected Securities (TIPS) as described in Gu } rkaynak et al. (2010).6 Both nominal and real zero-
coupon yields are derived using the Svensson-Nelson-Siegel yield curve estimation approach; see Svensson (1994) for details.
We use the Kim and Wright (2005) model to decompose nominal Treasury yields into their expected rate and term pre-
mium components. Kim and Wright (2005) use the Gu } rkaynak et al. (2007) nominal yields and survey forecasts of Treasury
bill rates as input in a three-factor no-arbitrage term structure model to fit and estimate the dynamics of yields over time;
we use the updated Kim and Wright (2005) estimates that are based on an expanded data sample.7 The estimated term struc-
ture model allows us to decompose nominal yields of any maturity into their average expected short rate and term premium
components. We use the model of D’Amico et al. (2018) to similarly decompose real (TIPS) yields into their expected rate and

3
We show in robustness exercises in the appendix that our main results are robust to using other proxies of monetary policy as well to using different event
window lengths.
4
This is a plausible assumption, as scheduled FOMC announcements have mostly occurred at either 12.30p.m., 2:00pm or 2:15p.m. in our sample (with the
current practice of releasing the FOMC statement at 2p.m. having been in place since early 2013), while major macroeconomic data are usually released at
either 8:30a.m.or 10:00a.m., and corporate news is typically released after 4:00p.m.
5
We verified that changes in the 2-year yield around FOMC announcements indeed capture both target and path surprises. In particular, when we regressed
changes in 2-year yields on the surprise in the change in the federal funds target rate of Gürkaynak et al. (2007), we find that the residual of this regression is
highly correlated with the path factor in Gürkaynak et al. (2005). To address Swanson (2019)’s concern about using a single statistic for measuring monetary
policy surprises, in a robustness exercise in Section 5 we show that our main results hold even if we separately use surprise changes in the federal funds target
rate, forward guidance, and large-scale asset purchases.
6
Nominal and real yields are available at https://www.federalreserve.gov/data/yield-curve-models.htm.
7
The term structure decomposition is available at https://www.federalreserve.gov/data/yield-curve-models.htm.

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

term premium components. D’Amico et al. (2018) estimate a no-arbitrage term structure on nominal yields, TIPS yields, and
data on seasonally-adjusted CPI, supplemented by survey forecasts of inflation and Treasury bill rates.8
To measure uncertainty about the future path of monetary policy, we follow Swanson (2006) and Swanson and Williams
(2014) and use the width of the market-implied distribution for the expected federal funds rate, in our case at the one-year
horizon, as implied by interest rate derivatives prices.9 We obtain the monetary policy uncertainty measure as follows. We
first construct the implied path for the federal funds rate using fed funds futures contracts. We then use prices of at-the-
money eurodollar futures options at different horizons to back out the implied volatility of the underlying eurodollar rate. These
implied volatilities are then adjusted for the level difference in volatility between the federal funds rate and eurodollar rates to
arrive at estimated implied volatilities for the federal funds rate. Finally, using these implied volatilities we obtain an implied
distribution for the federal funds rate at several fixed horizons. We then use the distance between the 5th and the 95th per-
centiles of the implied federal funds rate distribution one year-ahead as our selected measure of uncertainty.10 This measure,
expressed in basis points, is plotted in Fig. 1.11
Fig. 2 compares our measure of monetary policy uncertainty with two common proxies for uncertainty: the VIX—the
stock market volatility index constructed by the Chicago Board of Options Exchange—and the EPU—the economic policy
uncertainty index proposed by Baker et al. (2016). These two alternative indexes capture a broader concept of uncertainty
than monetary policy and, like our measure, they are available at a daily frequency. We use them in our empirical exercises
as control variables.12 As shown, although the three measures exhibit some degree of co-movement, independent variation is
larger: the correlation between our measure of monetary policy uncertainty and the VIX is only 23 percent, while the correla-
tion with the EPU is 12 percent. These correlations suggest that our monetary policy uncertainty measure captures specific epi-
sodes of uncertainty related to FOMC decisions that the other two measures of uncertainty are not able to capture.
Other measures of monetary policy uncertainty and macroeconomic uncertainty include those developed by Jurado et al.
(2015) and Husted et al. (2019).13 However, these measures are only available at a monthly frequency and are therefore less
suitable for conducting an event study analysis that relies on daily data around FOMC announcements.
Data on net positions of primary dealers in U.S. Treasury securities are published weekly by the Federal Reserve Bank of
New York. This data, also known as the FR 2004, captures the directional exposure of the 23 primary dealers of the Federal
Reserve in Treasury cash securities and forward contracts and is reported in current market values for different maturity
buckets.14 Duration for each bucket reflects the midpoint of that bucket, e.g., the duration for the 0–3 bucket is 1.5 years. Since
long bets for rates to go down and short bets for rates to go up are reported separately, net positions are calculated as the dif-
ference between long and short positions while gross positions are the sum of the two. In addition, average daily transactions
within the week are also reported. Data is published each Thursday, summarizing the positions as of at the end of Wednesday.
Fig. 3(a) shows that duration-weighted net positions range from
0.5 to 0.6 of gross position and that the net long position has
gotten larger in recent years.
For other investors—such as hedge funds and asset managers—we proxy interest rate positions with the weekly data from
the CFTC. Each Wednesday, the CFTC reports the numbers of long and short ‘‘speculative” derivative contracts—mostly
futures on on-the-run Treasury securities and options on these futures—as of the end of Tuesday held by a range of traders
for purposes other than ‘‘commercial” use (e.g., corporates trying to hedge a fixed-rate bond issuance). Net position is again
calculated as the difference between long and short positions while the gross position is the sum of the two. The CFTC also
reports the number of contracts outstanding, which is useful as a base to normalize the positions. We use the most com-
monly traded maturities, which are the 2-, 5-, and 10-year instruments. Fig. 3(b) shows that duration-weighted net position
ranges from
0.5 to 0.8 of gross position, and that a net short position has built up in recent years.

4. Empirical framework

} rkaynak et al. (2005), Gilchrist et al. (2015),

The empirical framework in this paper follows the event study approach of Gu
and Hanson and Stein (2015), among others. Specifically, we estimate the following regression model:

8
We use the updated estimates of this model discussed in Kim et al. (2019). The term structure decomposition results are available at https://www.
federalreserve.gov/econres/notes/feds-notes/DKW-updates.csv.
9
Swanson (2006) uses the same measure of monetary policy uncertainty as we do here to argue that since the late 1980s increased Federal Reserve
transparency has contributed to market participants’ increased ability to forecast future FOMC interest rate decisions.
10
We also used the same measure at shorter (e.g., 6 months-ahead) and longer (e.g., 18 months-ahead) horizons; our main results are not materially changed.
11
Bauer et al. (2019) also rely on derivatives data to estimate monetary policy uncertainty using a related methodology to ours. The correlation coefficient of
their series with our measure of uncertainty is 0.86, and the thrust of our findings are unchanged when we use their measure of monetary policy uncertainty.
12
The VIX is a popular forward-looking measure of uncertainty based on options with a 1-month expiration on the S&P 500 index. The Baker et al. (2016) EPU
index is an index of economic and political uncertainty based on the count of articles in leading U.S. newspapers that contain words related to uncertainty, the
economy, and policy-relevant terms. In Fig. 2, the three uncertainty measures are recorded on the days before an FOMC meeting; they are also standardized in
order to facilitate the comparison.
13
Jurado et al. (2015) measure time-varying macro uncertainty from a large set of monthly (mostly) macroeconomic series. Husted et al. (2019) construct
their monthly monetary policy index as the normalized frequency of news articles containing a combination of words related to uncertainty, monetary policy
and interest rates, and the Federal Reserve. Finally, Baker et al. (2016) also construct a specific monetary policy index using the same methodology as for their
EPU index, but only sum the count of articles on a monthly basis.
14
The list of U.S. primary dealers and aggregate position and other aggregate data across the primary dealers can be found at https://www.newyorkfed.
org/markets/primarydealers.html. At the time of our analysis, there were 23 primary dealers while at the time of writing this number had increased to 24.

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Fig 2. Shown are our measure of monetary policy uncertainty, based on Swanson (2006), and measured at the 12-month horizon (in black), the Economic
Policy Uncertainty index of Baker et al. (2016) (in red), as well as the VIX index (in blue). All series are daily and shown on the day before FOMC meetings in
each year. Shaded areas reflect NBER recessions. Source: CME Group; Bloomberg; www.policyuncertainty.com; authors’ calculations. (For interpretation of
the references to colour in this figure legend, the reader is referred to the web version of this article.)

Fig 3. Panel (a) shows the net weekly duration-weighted aggregated long position in U.S. Treasury securities of primary dealers as a fraction of gross
position, based on weekly FR 2004 data from the Federal Reserve Bank of New York (FRBNY). Figure (b) shows the net weekly duration-weighted long
position in futures on on-the-run Treasury securities, and options on these futures, of speculative investors as a fraction of gross positions, based on weekly
data from the Commodity Futures Trading Commission (CFTC). Source: FRBNY; CFTC.

d ¼ a þ bDmpd þ cUncertaintyd
1 þ dDmpd  Uncertaintyd
1 þ Xd
1 þ d

Dy m ð1Þ

where d is the second day (usually a Wednesday) of a FOMC meeting; Dym d is the two-day change (from close-of-business on
day d
1 to close-of-business day on d þ 1) in nominal or real Treasury yields with maturity m (either 5- or 10-years); Dmpd
is the monetary policy surprise, as proxied by the 60-minute change in the 2-year Treasury yield around FOMC announce-
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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

ments; Uncertaintyd
1 is the one year-ahead measure of monetary policy uncertainty implied by market prices, discussed in
Section 3.
Our regression framework posits that a monetary policy surprise, Dmpd affects yields linearly through the parameter b but
also that its overall effect varies with the level of monetary policy uncertainty through the parameter d. Throughout the rest
of this paper, we focus on the overall effect of a monetary policy surprise—the values of b þ d  Uncertaintyd
1 —conditional
on uncertainty being at the lower quartile, the median, or the upper quartile of its historical distribution.
The vector Xd
1 denotes other controls included in the regressions: the level of the 2-year Treasury yield, which controls
for the mechanical relationship between the level of interest rates and uncertainty about monetary policy; the VIX and EPU
indexes, which are included to assuage the concern that the response of yields to monetary policy surprises may also depend
on the level of economic and political uncertainty. We do not show the coefficients on Xd
1 in our results tables, but these are
available upon request.
FOMC announcements in our sample are from May 1999, the first year the FOMC started releasing a post-meeting state-
ment at each meeting, and through January 2018.15 Our sample consists of 156 scheduled policy announcements during the
conventional (May 1999 to December 2008), unconventional (January 2009 to November 2015), and post-ZLB monetary policy
regime (December 2015 to January 2018).
The analysis of the two components of yields, the expected rate and term premium components, uses the same frame-
work as regression (1). Denoting estimates of these two components as DERm m
d and DTP d , respectively, for yields with maturity
m, regressions (2) and (3) are applied to both nominal and real versions of the two.

d ¼ a þ bDmpd þ cUncertaintyd
1 þ dDmpd  Uncertaintyd
1 þ Xd
1 þ d

DERm ð2Þ

d ¼ a þ bDmpd þ cUncertaintyd
1 þ dDmpd  Uncertaintyd
1 þ Xd
1 þ d

DTP m ð3Þ
Finally, regressions of primary dealer and speculative positions use weekly changes in positions. It is crucial that the
changes are calculated such that event windows include FOMC announcements. Since the data for primary dealer positions
reports end-of-Wednesday (the day FOMC announcements are usually made) positions, the regression is:

DealerPosd
DealerPosd
5 ¼ a þ bDmpd þ cUncertaintyd
1 þ dDmpd  Uncertaintyd
1 þ Xd
1 þ d

m m
ð4Þ

where d
5 is the position on the previous Wednesday. For speculative positions, since the CFTC data reports end-of-
Tuesday positions, the appropriate change used as the dependent variable should be calculated based on the Tuesday before
FOMC meetings and the Tuesday after:

dþ4
CFTCPosd
1 ¼ a þ bDmpd þ cUncertaintyd
1 þ dDmpd  Uncertaintyd
1 þ Xd
1 þ d

CFTCPosm m
ð5Þ
m
Both DealerPosdand CFTCPosm
are first normalized (using gross positions, transaction volumes, or notional outstanding)
d
and then duration-weighted. Duration-weighting helps assess the impact of the monetary policy surprise on dealers’ and
investors’ entire portfolio.

5. Reactions of nominal and real yields to monetary policy surprises

Table 1 reports the main results of this paper: the response of nominal and real zero-coupon yields to a monetary policy
surprise when the one-year ahead measure of monetary policy uncertainty is low, medium, or high; that is when
Uncertaintyd
1 is in the lower quartile (81 basis points), median (183 basis points), and upper quartile (234 basis points)
of its historical distribution. Columns 1 and 2 use the change in the 5- and 10-year nominal rate as dependent variables,
respectively; columns 3 and 4 use the TIPS-implied real rates for the same maturities. The table reports the coefficients on
Dmpd (b) and Dmpd  Uncertaintyd (c), as well as the evaluation of effects at the three levels of uncertainty
(b þ d  Uncertaintyd
1 ).
The estimated effects suggest that positive monetary policy surprises, or ‘‘tightening” shocks, are associated with an
increase in nominal and real rates (first row in the table), but this increase is muted during periods of high monetary policy
uncertainty (second row). Based on columns 2 and 4, a 10-basis point tightening shock (approximately a two standard devi-
ation move) leads on average to a 7 and 9 basis point increase in 10-year nominal and real rates, respectively, when the level
of monetary uncertainty is at its median value (fourth row). The response of nominal and real rates increases to 15 and 20
basis points when the uncertainty about monetary policy is at the lower quartile of its historical distribution. In contrast, the
responses fall to just 3 to 4 basis points when the uncertainty about monetary policy is at its upper quartile.
Altogether, the results in Table 1 are consistent with the event-study literature showing that monetary policy surprises
have large effects on long-term interest rates (Gilchrist et al., 2015; Gertler and Karadi, 2015; Hanson and Stein, 2015;
Altavilla et al., 2017; Nakamura and Steinsson, 2018). Our findings expand on these existing studies by showing that the
pass-through of monetary policy surprises to longer-term yields depends on the prevailing level of monetary policy
uncertainty.

15
The beginning of the sample also coincides with the first year in which prices of TIPS securities are reliable enough from which to estimate a real yield
curve.

7
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 1
Response of U.S. Treasury nominal and real yields to monetary policy surprises.

Dependent Variable
Nominal Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 2.138*** 2.140*** 3.423*** 2.816***
(5.72) (3.95) (7.05) (5.57)
Dmpd  uncertaintyd-1
0.678***
0.757***
1.201***
0.998***
(-4.01) (-3.21) (-5.99) (-4.75)
Evaluation
Low Uncertainty 1.580*** 1.517*** 2.434*** 1.995***
(25th perc.) (6.42) (4.28) (7.44) (5.92)
Medium Uncertainty 0.868*** 0.723*** 1.174*** 0.948***
(50th perc.) (6.94) (4.82) (8.00) (6.89)
High Uncertainty 0.521*** 0.336*** 0.560*** 0.438***
(75th perc.) (4.05) (2.61) (5.11) (4.92)
Observations 156 156 156 156
R-squared 0.30 0.21 0.46 0.40

Note: Reported coefficients denote the two-day response, around FOMC dates, of nominal and real U.S. Treasury yields (with five- and ten-year maturity) to
monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute change in the two-year
nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy
uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High
uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is May 1999 to
January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in
parenthesis below the estimated coefficients.

Table 2
Response of U.S. Treasury instantaneous forward rates to monetary policy surprises.

Dependent Variable
Nominal instantaneous forward ending TIPS instantaneous forward ending in
in
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 2.773*** 1.483* 3.329*** 1.246*
(3.94) (1.96) (4.74) (1.88)
Dmpd  uncertaintyd-1
1.036***
0.596*
1.109***
0.495*
(-3.41) (-1.81) (-3.66) (-1.76)
Evaluation
Low Uncertainty 1.921*** 0.993** 2.417*** 0.838*
(25th perc.) (4.15) (2.01) (5.20) (1.91)
Medium Uncertainty 0.833*** 0.367* 1.254*** 0.319*
(50th perc.) (4.38) (1.88) (6.00) (1.74)
High Uncertainty 0.303** 0.063 0.687*** 0.065
(75th perc.) (1.98) (0.40) (3.80) (0.48)
Observations 156 156 156 156
R-squared 0.20 0.08 0.08 0.08

Note: Reported coefficients denote the two-day response, around FOMC dates, of instantaneous forward nominal and real U.S. Treasury rates ending in 5
and 10 years ahead to monetary policy surprises, for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute
change in the two-year nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our
measure of monetary policy uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year
ahead. Low/Medium/High uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution.
Sample period is May 1999 to January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust
standard errors, are shown in parenthesis below the estimated coefficients.

6. Robustness tests

We perform a battery of robustness checks on our main result. Table 2 is the same as Table 1, except we use instantaneous
forward rates instead of zero-coupon rates as some (e.g., Hanson and Stein, 2015) argue that reaction of far-ahead forward
rates best illustrates the degree of long-run non-neutrality of monetary policy. Table 2 confirms that our key result of larger
reaction in rates when uncertainty about monetary policy is low holds when forward rates far-ahead are used.

8
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 3
Response of U.S. Treasury real yields to monetary policy surprises in different sample periods.

1999–2007 2008–2018
Dependent Variable Dependent Variable
TIPS Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 3.927*** 3.593*** 3.686*** 2.449***
(4.64) (4.13) (5.28) (3.11)
Dmpd  uncertaintyd-1
1.403***
1.314***
1.814**
1.067
(-4.05) (-3.64) (-2.57) (-1.34)
Evaluation
Low Uncertainty 1.188*** 1.028*** 3.089*** 2.097***
(25th perc.) (5.96) (5.54) (6.40) (3.88)
Medium Uncertainty 0.681*** 0.553*** 2.348*** 1.661***
(50th perc.) (5.56) (5.71) (9.10) (6.03)
High Uncertainty 0.327** 0.221** 2.103*** 1.517***
(75th perc.) (2.57) (2.01) (9.59) (6.70)
Observations 92 92 64 64
R-squared 0.48 0.45 0.50 0.40

Note: Reported coefficients denote the two-day response, around FOMC dates, of real U.S. Treasury yields (with five- and ten-year maturity) to monetary
policy surprises for various levels of monetary policy uncertainty. Columns 1 and 2 use FOMC dates between 1999 and 2007 (pre-crisis), while columns 3
and 4 uses dates between 2008 and 2018. Monetary policy surprises are proxied by the 60-minute change in the two-year nominal yield surrounding
(15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy uncertainty prevailing the
day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High uncertainty corresponds to the
lower, median and upper quartile of the monetary policy uncertainty historical distribution. ***, ** and * indicate statistical significance at 1%, 5%, and 10%
level, respectively. t-ratios, based on robust standard errors, are shown in parenthesis below the estimated coefficients.

Tables 3 and 4 test sub-sample robustness: in Table 3, we show that the effects of monetary policy uncertainty on
the pass-through of monetary policy surprises to real yields are present during both pre- and post-crisis periods. One
can also see that the effects are far more pronounced in the post-crisis period, perhaps as more intense ‘‘search for
yield” behavior or lower market-making capacity amplify yield moves (see, for example, Adrian et al., 2013b).16 Table 4
aims to show that the main results are not due to the ZLB period—a period featuring historically low uncertainty. The coef-
ficient of interest in this Table is the triple interaction term Dmpd  Uncertaintyd
1  ZLB where ZLB is a dummy variable
indicating the ZLB period, which is equal to 1 between January 2009 and November 2015 and is 0 elsewhere. As shown,
accounting for the ZLB does not materially affect our main result that the transmission of monetary policy surprises to
yields is muted when monetary policy uncertainty is high. In Table 5 the dependent variables are measured in a 60-
minute window around FOMC announcements, rather than 2-day changes to the nominal and real yields; as can be seen,
the main results continue to hold.
Recognizing that monetary policy surprises can be measured in various ways, Table 6 replaces the 60-minute window
change in the 2-year yield measure of surprise with a 30-minute window change (columns 1 and 2), and the Nakamura
and Steinsson (2018) monetary policy surprises.17 Our main results continue to hold with either measure of monetary policy
surprises; they in fact are estimated to be stronger.
We also address the critique of Swanson (2019) that using a single statistic around FOMC communications for measuring
monetary policy surprises is unlikely to capture the multiple dimensions of monetary policy. Instead of including changes in
2-year yields and 2-year yield changes interacted with our measure of monetary policy uncertainty, we run regressions using
the three separate shocks of Swanson (2019) – federal funds target rate, forward guidance, and large-scale asset purchase
shocks – all interacted with our uncertainty measure. The results are reported in Table 7. As shown, our main results con-
tinue to hold: the pass-through of monetary policy surprises, particularly the target and forward guidance shocks, to longer-
term yields is amplified when uncertainty about monetary policy is low.
Finally, in Table 8, we also interact monetary policy surprises with two other measures of uncertainty, the VIX and EPU, to
ascertain that the effects coming from Uncertaintyd
1 are indeed due to genuine monetary policy uncertainty, rather than
driven by financial or economic uncertainty that are embedded in the measures of monetary policy uncertainty. It turns
out that neither VIX nor EPU affect the response of nominal and real yields to monetary policy surprises the same way that
monetary policy uncertainty does. In Table 8, the interaction coefficients Dmpd  VIX d
1 and Dmpd  EPU d
1 have a positive

16
Gilchrist et al. (2015) also find larger responses of yields to monetary policy surprises during the Fed’s unconventional monetary policy period.
17
Nakamura and Steinsson (2018)’s monetary policy shock is the first principal component of 30-minute changes around FOMC announcements in a set of
federal funds futures and eurodollar futures with maturities up to one year.

9
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 4
Response of U.S. Treasury nominal and real yields to monetary policy surprises: interaction with the ZLB period.

Dependent Variable
Nominal Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 1.898*** 1.393** 2.090*** 1.680***
(3.56) (2.41) (4.71) (4.85)
uncertaintyd-1 0.012 0.019 0.020 0.025
(0.65) (0.97) (1.20) (1.46)
Dmpd  uncertaintyd-1
0.576**
0.454*
0.663***
0.535***
(-2.51) (-1.82) (-3.39) (-3.45)
ZLB 0.027 0.027 0.007 0.034
(0.72) (0.65) (0.18) (0.90)
Dmpd  ZLB 0.589 0.894 1.875** 1.595*
(0.67) (0.75) (2.19) (1.85)
uncertaintyd-1  ZLB
0.030
0.002
0.001
0.003
(-0.93) (-0.05) (-0.02) (-0.11)
Dmpd  uncertaintyd-1  ZLB
0.481
0.135
0.585
0.487
(-0.74) (-0.15) (-0.78) (-0.73)
Observations 156 156 156 156
R-squared 0.31 0.23 0.49 0.43

Note: Reported coefficients denote the two-day response, around FOMC dates, of nominal and real U.S. Treasury yields (with five- and ten-year maturity) to
monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute change in the two-year
nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy
uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. ZLB is an indicator
variable that is equal one when the federal funds rate targe range is between 0% and 0.25%. Low/Medium/High uncertainty corresponds to the lower,
median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is May 1999 to January 2018. ***, ** and * indicate
statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in parenthesis below the estimated
coefficients.

Table 5
Response of 60-minute changes in U.S. Treasury nominal and real yields to monetary policy surprises.

Dependent Variable
Nominal Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 1.683*** 1.281*** 2.079*** 1.485***
(7.04) (3.81) (7.79) (4.03)
Dmpd  uncertaintyd-1
0.335***
0.289**
0.533***
0.385**
(-3.36) (-2.06) (-4.63) (-2.53)
Evaluation
Low Uncertainty 1.404*** 1.044*** 1.744*** 1.193***
(25th perc.) (9.18) (4.68) (8.87) (4.69)
Medium Uncertainty 1.069*** 0.739*** 1.553*** 1.008***
(50th perc.) (17.44) (8.71) (9.84) (5.54)
High Uncertainty 0.905*** 0.593*** 1.036*** 0.673***
(75th perc.) (24.50) (12.29) (15.39) (11.46)
Observations 157 157 116 131
R-squared 0.86 0.62 0.84 0.62

Note: Reported coefficients denote the 60-minute response, around FOMC dates, of nominal and real U.S. Treasury yields (with five- and ten-year maturity)
to monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute change in the two-
year nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary
policy uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High
uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is May 1999 to
January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in
parenthesis below the estimated coefficients.

sign, indicating that the pass through of monetary policy surprise to yields is amplified when uncertainty related to the stock
market or economic policy is high. This result suggests that our choice for monetary policy uncertainty is not just picking up
other types of uncertainty.

10
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 6
Response of U.S. Treasury real yields to monetary policy surprises: alternative measures of policy surprises.

30-minute MP shocks Nakamura-Steinsson shocks

Dependent Variable Dependent Variable
TIPS Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 3.612*** 2.886*** 5.145*** 3.731***
(5.76) (5.03) (4.27) (3.16)
Dmpd  uncertaintyd-1
1.248***
1.023***
1.925***
1.426***
(-4.91) (-4.35) (-3.74) (-2.82)
Evaluation
Low Uncertainty 2.585*** 2.045*** 4.060*** 2.927***
(25th perc.) (6.06) (5.28) (4.43) (3.25)
Medium Uncertainty 1.276*** 0.972*** 1.379*** 0.941***
(50th perc.) (6.37) (5.62) (5.44) (3.83)
High Uncertainty 0.638*** 0.450*** 0.501*** 0.291***
(75th perc.) (4.26) (3.62) (2.74) (1.68)
Observations 156 156 104 104
R-squared 0.39 0.32 0.26 0.21

Note: Reported coefficients denote the two-day response, around FOMC dates, of real U.S. Treasury yields (with five- and ten-year maturity) to monetary
policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by (i) the 30-minute change in the two-year
nominal yield surrounding (10 minutes prior and 20 minutes after) FOMC announcements shown in columns 1–2, (ii) surprises proxied by the Nakamura
and Steinsson (2018) measure, which is the 30-minute change surrounding FOMC announcements (15 minutes prior and 15 minutes after) of the first
principle component of interest rates at different maturities spanning the first year of the term structure (columns 3–4). Uncertainty refers to the level of
our measure of monetary policy uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year
ahead. Low/Medium/High uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution.
Sample period is May 1999 to January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust
standard errors, are shown in parenthesis below the estimated coefficients.

Table 7
Response of U.S. Treasury nominal and real yields to monetary policy surprises: Swanson (2019) shocks.

Dependent Variable
Nominal Yields TIPS Yields
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
uncertaintyd-1 0.010 0.019 0.030* 0.022
(-0.73) (-1.09) (-1.85) (-1.51)
Dfedfundsd 0.126* 0.212*** 0.248*** 0.214**
(-1.71) (-3.06) (-2.92) (-2.55)
Dfedfundsd  uncertaintyd-1
0.048*
0.087***
0.090***
0.081**
(-1.69) (-3.11) (-2.63) (-2.41)
DFGd 0.071*** 0.054** 0.138*** 0.102***
(-3.72) (-2.05) (-5.80) (-4.45)
DFGd  uncertaintyd-1
0.017*
0.012
0.048***
0.034***
(-1.90) (-1.04) (-4.16) (-3.19)
DLSAPd
0.068***
0.093***
0.046*
0.077***
(-4.13) (-3.76) (-1.70) (-3.18)
DLSAPd  uncertaintyd-1 0.026** 0.033* 0.008 0.025*
(-2.15) (-1.87) (-0.52) (-1.85)
Observations 155 155 155 155
R-squared 0.36 0.37 0.51 0.51

Note: Reported coefficients denote the two-day response, around FOMC dates, of nominal and real U.S. Treasury yields (with five- and ten-year maturity) to
monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises included are the fed funds target rate shock, forward
guidance shock, and large-scale asset purchase shocks, denoted by Dfedfunds, DFG, and DLSAP, respectively. Uncertainty refers to the level of our measure
of monetary policy uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/
Medium/High uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is
May 1999 to January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are
shown in parenthesis below the estimated coefficients.

11
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 8
Response of U.S. Treasury nominal and real yields to monetary policy surprises: interaction of different uncertainty measures with surprises.

Dependent Variable
TIPS Yields
5-year 10-year
(1) (2) (3) (4) (5) (6)
Coefficients
Dmpd 3.423***
0.495
0.443 2.816***
0.593
0.573
(-7.05) (-1.01) (-0.86) (-5.57) (-1.43) (-1.56)
uncertaintyd-1 0.019 0.016
(-1.28) (-1.09)
Dmpd  uncertaintyd-1
1.201***
0.998***
(-5.99) (-4.75)
EPUd-1
0.000
0.001
0.000
0.001
0.001
0.001
(-0.34) (-0.66) (-0.34) (-0.61) (-0.95) (-0.60)
Dmpd  EPUd-1 0.014** 0.014***
(-2.40) (-2.70)
VIXd-1
0.002
0.003
0.002
0.003
0.003
0.002
(-1.37) (-1.48) (-1.33) (-1.31) (-1.59) (-1.36)
Dmpd  VIXd-1 0.055** 0.053***
(-2.43) (-3.24)
Observations 156 157 157 156 157 157
R-squared 0.46 0.34 0.34 0.4 0.32 0.32

Note: Reported coefficients denote the two-day response, around FOMC dates, of nominal and real U.S. Treasury yields (with five- and ten-year maturity) to
monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute change in the two-year
nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Monetary policy uncertainty refers to the uncertainty, prevailing
the day before FOMC dates, for the federal funds rate one-year ahead as implied by derivative prices; EPU is the economic policy uncertainty measures of
Baker et al. (2009). Low/Medium/High uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical
distribution. Sample period is May 1999 to January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on
robust standard errors, are shown in parenthesis below the estimated coefficients.

Table 9
Response of expected future nominal rates and term premiums to monetary policy surprises.

Dependent Variable
Expected rates Term premium
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 0.722*** 0.671*** 0.913*** 1.116***
(5.31) (5.53) (5.62) (5.30)
Dmpd  uncertaintyd-1
0.217***
0.216***
0.303***
0.385***
(-3.13) (-3.68) (-4.04) (-4.02)
Evaluation
Low Uncertainty 0.543*** 0.493*** 0.663*** 0.799***
(25th perc.) (-5.85) (6.00) (6.31) (5.85)
Medium Uncertainty 0.316*** 0.265*** 0.345*** 0.395***
(50th perc.) (-4.23) (4.55) (6.85) (6.25)
High Uncertainty 0.204** 0.155** 0.191*** 0.198***
(75th perc.) (-2.30) (2.30) (3.55) (3.07)
Observations 156 156 156 156
R-squared 0.27 0.27 0.28 0.27

Note: Reported coefficients denote the two-day response, around FOMC dates, of future expected rates and term premiums for nominal U.S. Treasury yields
(with five- and ten- year maturity) to monetary policy surprises for various levels of monetary policy uncertainty. Expected rates and term premiums are
estimated using the Kim and Wright (2005) model. Monetary policy surprises are proxied by the 60-minute change in the two-year nominal yield
surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy uncertainty
prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High uncertainty
corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is May 1991 to January 2018.
***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in parenthesis below
the estimated coefficients.

7. Investigating the mechanism

Table 9 decomposes the changes in 5-, and 10-year nominal Treasury yields into their changes in the average expected
short rate component (columns 1 and 2) and changes in the term premium component (columns 3 and 4), using the Kim and

12
M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 10
Response of expected future real rates and real term premiums to monetary policy surprises.

Dependent Variable
Expected real rates Real term premium
5-year 10-year 5-year 10-year
(1) (2) (3) (4)
Coefficients
Dmpd 0.119 0.300*** 0.922*** 1.119***
(0.88) (4.39) (5.45) (5.06)
Dmpd  uncertaintyd-1 0.043
0.071**
0.319***
0.405***
(0.65) (-1.98) (-4.20) (-4.13)
Evaluation
Low Uncertainty 0.154* 0.242*** 0.660*** 0.785***
(25th perc.) (1.72) (5.19) (5.99) (5.46)
Medium Uncertainty 0.199*** 0.168*** 0.325*** 0.360***
(50th perc.) (3.28) (4.36) (6.72) (5.92)
High Uncertainty 0.221*** 0.132*** 0.161*** 0.153***
(75th perc.) (3.12) (2.85) (3.46) (2.75)
Observations 156 156 156 156
R-squared 0.23 0.30 0.30 0.28

Note: Reported coefficients denote the two-day response, around FOMC dates, of future expected rates and term premiums for real U.S. Treasury yields
(with five- and ten- year maturity) to monetary policy surprises for various levels of monetary policy uncertainty. Expected rates and term premiums are
estimated using the D’Amico et al. (2018) model. Monetary policy surprises are proxied by the 60-minute change in the two-year nominal yield surrounding
(15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy uncertainty prevailing the
day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High uncertainty corresponds to the
lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is May 1991 to January 2018. ***, ** and *
indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in parenthesis below the estimated
coefficients.

Wright (2005) estimate of each component. This exercise helps determine whether the strong policy surprise pass-through
amid low uncertainty is due to a re-evaluation of the economic outlook, or due to changes in risk premiums.
As shown in Table 9, the response of nominal rates to monetary policy surprises reflects predominantly changes to the
term premium, especially for the 10-year yield. When the results in columns 2 and 4 are compared, it is evident that
although both components react in a statistically significant way, the response of the 10-year term premium is much larger
than the response of the 10-year expected rate component, irrespective of the level of uncertainty. Similar to the results in
Table 1, the lower monetary policy uncertainty, the larger the responses. When uncertainty is in the lower quartile of its dis-
tribution, a 10-basis point tightening shock leads to an 8-basis point increase in the 10-year term premium; the response
drops to just 2 basis points when uncertainty is in the upper quartile. As expected, the differences in reaction between
the expected rate and term premium components are less marked for the 5-year yield, given that the term premium com-
ponent is smaller for shorter-maturity Treasury securities.18
Table 10 contains the results of the same exercise applied to a decomposition of real yields into their average expected
real short rate and real term premium components using the approach of D’Amico et al. (2018). While the responses of the 5-
year expected real rates to a given 10-basis point monetary policy surprise is roughly the same for different levels of
Uncertaintyd
1 (about 2 basis points), the responses of the term premium to a similar monetary policy shock vary greatly:
a 10 basis point monetary policy shock moves the 5-year real term premium by 6.6 basis points when uncertainty is at
its lower quartile, while this response drops to 1.6 basis points with uncertainty at its upper quartile (column 3). The effects
of uncertainty are even stronger for the 10-year real term premium (column 4).
In sum, these results strongly suggest that uncertainty changes the pass-through of monetary policy surprises through
real risk premiums.

8. Position adjustments by primary dealers and speculators

The results in the previous section are consistent with the view of Hanson and Stein (2015) that tightening shocks cause
investors to sell long-term bonds, above and beyond what is required by the revelation of news about the expected path of
policy. However, compared to Hanson and Stein (2015), we investigate whether such selling is especially large when uncer-
tainty is low.

18
In a robustness check, we also replaced the Kim and Wright (2005) expected rates and term premiums with the decomposition estimates of Adrian et al.
(2013b). While the level of monetary policy uncertainty matters for pass-through of surprises to both the expected rate and term premium components, the
reaction of term premiums are stronger. This again suggests that uncertainty changes the pass-through of monetary policy surprises through a risk premium
channel.

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 11
Response of broker dealers’ net U.S. Treasury positions to monetary policy surprises.

Dependent Variable
DNet dealer position DNet dealer position
(normalized by gross positions) (normalized by transactions)
(1) (2)
Coefficients
Dmpd
0.247***
0.299***
(-4.48) (-3.18)
Dmpd  uncertaintyd-1 0.131*** 0.156***
(4.45) (3.07)
Evaluation
Low Uncertainty
0.147***
0.180***
(25th perc.) (-4.06) (-2.84)
Medium Uncertainty
0.101***
0.125***
(50th perc.) (-3.45) (-2.37)
High Uncertainty 0.049 0.054
(75th perc.) (1.66) (-0.94)
Observations 129 129
R-squared 0.20 0.13

Note: Reported coefficients denote the five-day changes, around FOMC dates, of primary dealers’ duration-weighted net positions to 0–3 year, 3–6 year, 6–
11 year, and 11–30 year U.S. Treasury securities (reported by FRBNY) normalized by gross positions (column 1) or transactions (column 2) to monetary
policy surprises for various levels of monetary policy uncertainty. Monetary policy surprises are proxied by the 60-minute change in the two-year nominal
yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements. Uncertainty refers to the level of our measure of monetary policy
uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices for the federal funds rate one-year ahead. Low/Medium/High
uncertainty corresponds to the lower, median and upper quartile of the monetary policy uncertainty historical distribution. Sample period is January 2005
to January 2018. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level, respectively. t-ratios, based on robust standard errors, are shown in
parenthesis below the estimated coefficients.

This investigation begins with primary dealers. Fleming et al. (2016) and Brain et al. (2018), estimate that primary
dealers are the largest participants in the Treasury cash securities market, accounting for roughly 50 percent of trading
activity. As described in Section 3, the quantity of interest is primary dealers’ net duration-weighted position in U.S.
Treasury securities, which captures the directional exposure of primary dealers to Treasury yields averaged across a
number of maturity buckets. We apply the regression in (4) to the net position variable. The results are displayed in
Table 11, when either net position is normalized by gross position (column 1), or by transaction volume (column 2).
Both columns suggest that net position adjustments are sizeable when uncertainty is low. Upon a 10-basis point tight-
ening shock, net position as a fraction of gross position declines by 1.5 percentage points, while as a fraction of transaction
volume it declines by 1.8 percentage points; both of these moves are just shy of one standard deviation. When uncertainty is
high, net position adjustments by dealers are not statistically significant. These results are consistent with our conjecture
that dealers are positioned aggressively when monetary policy uncertainty is low and when a positive monetary policy sur-
prise realizes, their attempts to cut losses or to scale down risk-taking lead to rises in term premiums and ultimately, longer-
term interest rates.
While primary dealers are important players in the interest rate market, they are certainly not the only investors. To pro-
vide further support to our position adjustment hypothesis, we assess the behavior of other investors—in particular hedge
funds and asset managers—using data on ‘‘speculative” positioning in Treasury futures and options on futures. Table 12 con-
tains the results of running regression (5). Column 1 displays the results when net position of speculators is normalized by
their gross position and column 2 when net position is normalized by aggregate open interest.
When uncertainty is low, upon a 10-basis point tightening shock, speculative net position as a fraction of gross position
moves down by 4.7 percentage points, while net position as a fraction of open interest goes down by 1 percentage point. As is
the case for primary dealers, these moves are roughly equal to one standard deviation. In contrast, when uncertainty is high
such adjustments do not occur.
Our results in Tables 4 and 5 clearly demonstrate that position adjustments made by dealers and speculative investors
depend on the prevailing level of uncertainty about monetary policy. Although the magnitudes of adjustment are somewhat
moderate for both types of investors during low uncertainty, adjustments are statistically significant and their combined
effects could certainly significantly move term premiums and yields. That said, our results do not rule out other possible
mechanisms behind the term premium channel, including shifts in risk aversion and other factors (see, for example, Ray,
2019).

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M. De Pooter, G. Favara, M. Modugno et al. Journal of International Money and Finance xxx (xxxx) xxx

Table 12
Response of changes in CFTC speculative futures positions to monetary policy surprises.

Dependent Variable
DNet spec position DNet spec position
(normalized by gross positions) (normalized by open interest)
(1) (2)
Coefficients
Dmpd
0.757**
0.165**
(-2.38) (-2.32)
Dmpd  uncertaintyd-1 0.364*** 0.080**
(2.73) (2.58)
Evaluation
Low Uncertainty
0.474**
0.103**
(25th perc.) (-2.18) (-2.14)
Medium Uncertainty
0.087
0.019
(50th perc.) (-0.94) (-0.88)
High Uncertainty 0.101 0.022
(75th perc.) (1.59) (1.25)
Observations 128 128
R-squared 0.09 0.07

Note: Reported coefficients denote the five-day changes, around FOMC dates, of speculative investors’ duration-weighted sum of the number of net non-
commercial futures and options futures contracts outstanding for 2-year, 5-year, and 10-year U.S. Treasury securities (reported by CTFC) normalized by
gross positions (column 1) or open interest (column 2) to monetary policy surprises for various levels of monetary policy uncertainty. Monetary policy
surprises are proxied by the 60-minute change in the two-year nominal yield surrounding (15 minutes prior and 45 minutes after) FOMC announcements.
Uncertainty refers to the level of our measure of monetary policy uncertainty prevailing the day before the FOMC meeting, as implied by derivative prices
for the federal funds rate one-year ahead. Low/Medium/High uncertainty corresponds to the lower, median and upper quartile of the monetary policy
uncertainty historical distribution. Sample period is January 1995 to December 2017. ***, ** and * indicate statistical significance at 1%, 5%, and 10% level,
respectively. t-ratios, based on robust standard errors, are shown in parenthesis below the estimated coefficients.

9. Conclusions

In this paper we provided evidence that the level of uncertainty about the path of monetary policy matters for the trans-
mission of monetary policy to medium- and long-term interest rates. We first show that for a given monetary policy surprise,
the reaction of 5- and 10-year nominal and real yields is more pronounced when the level of monetary policy uncertainty is
low than when it is high. We next show that this result is predominantly driven by the term premium component of yields,
suggesting that uncertainty affects risk premiums. In support of this evidence, we document that both primary dealers and
speculators typically unwind their positions in Treasury securities and associated derivatives when a positive monetary pol-
icy surprises arrives, thereby amplifying the pass-through of the surprise to term premiums and overall yields.
There are a number of ways in which our analysis can be extended and strengthened. A promising avenue for further
research is to investigate the role of institutional investors such as pension funds and insurance companies, whose demand
have been shown to play an important role in driving the long end of the yield curve (see Greenwood and Vissing-Jorgensen,
2018). One can also examine whether alternative channels could be responsible for the empirical results we document in this
paper, such as shifts in broker dealers’ risk aversion (see He et al., 2017). Another extension is to consider a wider set of asset
prices, including corporate bond yields, equity prices, exchange rates, and foreign yields.

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